 By Emma Radmore, Managing Associate at SNR Denton UK LLP and Dan Brown, Partner at SNR Denton UK LLP
The recent Lloyd’s Market Bulletin Y4567 highlights certain legal and regulatory risks raised by distribution costs, broker remuneration and additional insurer charges. Brokers, managing agents and underwriters in both the Lloyd’s and company markets must reassess the risks they face and ensure their practices do not expose them to the risk of committing offences under the Bribery Act 2010 (BA).
Issues of primary concern
The insurance markets rely heavily on brokers, and on payment flows from brokers, underwriters and other third parties. This means parties must be aware of (among other things) the constantly changing legal requirements and developing practices related to bribery and corruption. As market practices evolve, stakeholders should check that any changes do not unacceptably alter their exposure to allegations of financial crime risk.
In 2010 Lloyd’s asked managing agents to notify it of any arrangements in place that provided for payment of commission or fees, or any other payment, to the broker in addition to ordinary brokerage. The risks should be assessed in relation to ordinary brokerage and all other fees as described below.
The crux of the BA
The BA prohibits any UK person from offering or receiving a bribe, and makes it a corporate offence for a person doing business in the UK to fail to prevent bribery by “associated persons”. “Associated persons” includes any person who provides services to the company, such as any agent. “Adequate procedures” must exist to prevent agents from bribing to get or keep business for the principal.
The BA gives a vague definition of what constitutes bribery. The essence is that:
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some financial or other advantage must be offered, promised or given or received; and
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that advantage must be intended to induce or reward another person for “improper performance” of a “relevant function or activity”
“Improper performance” implies action or inaction that breaches a duty of trust, good faith or impartiality implicit in the job. This creates a concept that is both woolly and wide. One factor to help assess whether a payment or other reward constitutes bribery is whether the business would have been done in the same way, at the same price, between the same parties and on the same terms, had the “reward” not existed, and whether any future business between the parties will be affected by it. In the contingent fee arena, for example, each party should ask whether each placement was or would be made solely to procure a contingent fee, or in the best interests of the policyholder regardless of the existence of the fee.
Areas of potential concern addressed by Lloyd’s
Ordinary brokerage
Lloyd’s is comfortable that payment of brokerage within the “usual” range is appropriate. Moreover, Lloyd’s has been advised it is “inconceivable” that payments within the usual range for the relevant business, and which have been fully disclosed to the client, would give rise to any BA concerns. Firms must conduct the appropriate risk assessments on the insurers and brokers, the relevant jurisdictions and the products, ensuring appropriate due diligence, and documenting the basis of the “usual” payment. What is “usual” is not addressed and would necessarily be a case-by-case decision based on the line of business, status of the market and other factors related to the placement. The critical issue is for the person at risk of committing the offence to assess their purpose in making or receiving the payment and come to a documented conclusion as to why they decide to proceed.
Additional fees, charges and commissions
Lloyd’s is concerned that where underwriters pay brokerage that is outside the usual range, or pay additional fees, charges or commissions to a broker representing the insured, there is a risk these payments might induce “improper performance”. For example, the broker might place business with underwriters against the best interests of the insured or might otherwise improperly perform its duties. In terms of BA risk, the broker would need to carry out and document a careful risk assessment to satisfy itself that nothing about the arrangements would cause it to perform its functions improperly, and that it has no concerns over the manner in which the additional payments are made. Managing agents are also at risk if a fee is ultimately deemed to be a bribe so may want to contractually oblige the broker to conduct and/or share this analysis. There are some potential disadvantages to managing agents involving themselves in this process, which should be assessed on a case-by-case basis.
Lloyd’s says it is the commercial reality of the arrangements that is important, rather than how they are described in any agreement. Although this is undoubtedly correct, the bulletin does not attempt to distinguish between payments that might properly influence behaviour and payments that influence improper performance and therefore constitute a bribe under the BA. There is perhaps some degree of comfort to be taken from the guidelines the prosecuting authorities must follow. There must be both (a) a reasonable likelihood of a successful prosecution and (b) a public interest justification to prosecute. Thus, the bulletin seems to focus on payments that result in decisions or actions by the broker that are adverse to the policyholder’s best interests, deeming those payments to constitute a bribe or attempted bribe. So this may allow payments – even payments based on the volume or profitability of business – that do not induce “improper performance”, but which nonetheless do have an impact on some transactions that are harmless to policyholders.
What does Lloyd’s suggest as a course of conduct for managing agents?
The bulletin caused concern and confusion in the market. Lloyd's issued a note clarifying the guidance, and its expectations, which notes the guidance does not say these arrangements must never happen, but that managing agents should regard them as high risk, treat them with great caution and take legal advice where appropriate.
Lloyd’s expects each managing agent to address certain questions in respect of additional payment arrangements. The managing agent should keep records of all payments it decides are acceptable, and the bases for such decisions. Lloyd’s gave the following examples:
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payments are never acceptable if contingent on profitability or volumes of business insofar as they may entail a very high bribery risk. This example appears to assume that any such payment necessarily constitutes inducement to “improper performance”, although that might not be clear in all instances. Lloyd’s broadly recommends that no such payments be made, and that each managing agent take legal advice to assess the commercial motivation for other additional payments;
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where payments are in return for other services, the managing agent should assess whether the services are of the appropriate value and properly documented;
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all additional payments must be clearly disclosed to clients; and
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brokers must have appropriate and proportionate processes in place to ensure their staff carry out their fiduciary obligations to their clients in all circumstances.
We can help
We have advised many clients on compliance with increasingly onerous financial crime laws. We can review, revise or provide drafting assistance on risk assessments, statements of policy, procedures and training modules, and have provided many clients with induction or refresher training on each aspect of financial crime and FSA expectations. In particular, we can help with crafting company-specific guidance on what payments to brokers might constitute improper bribery payments.
Emma Radmore is a Managing Associate and Dan Brown is a Partner at SNR Denton UK LLP.
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